Refinance Home Loan Points Fees: About Finding Low Cost Refinance Options
Refinancing used to be beyond the reach of common man. Today home loan refinance is within the grasp of everyone with lowered refinance home loan points fees. Refinance home loan points fees are options that push your refinance costs up. Typically points must be in the range of 1-3, anything more than 5 point level should be questioned. There are no such options to charge you as high as 5 refinance home loan points’ fees on refinancing. Additionally, there are different lenders today who don’t really charge any refinance home loan points fees.
Points are percentage rate of outstanding balance. A one point fees mean you should pay one percent of the outstanding amount as fees while refinancing. If you have an outstanding balance of $ 30,000 and you have to pay three points, your refinance home loan points fees will be $ 900. Due to the higher amounts one had to pay as refinance home loan points fees, many lenders have now waived application fees and other fees associated with refinancing. There can however be a catch in the form of additional 0.5% or 1% of interest rate. If the waiver of legal fees is to trade with additional interest rate, in most cases it will be better to pay the legal fees than to accept the higher interest rate.
Why refinance home loan points fees? After all you are paying off the loan in full and earlier than expected. Lenders charge refinance home loan points fees because they expected to receive from your higher interest and profits from you in the long run. But with refinance, their profit is blocked and you will be required to pay refinance home loan points fees. Longer loan terms make more money for the lenders than short term loans. The refinance home loan points fees is a way to recoup some of the loss.
The refinance home loan points fees can also be considered interest paid upfront at the time of borrowing. Paying higher points entitles for lower interest rates too. With lower interest rate refinance loan, it will typically take 24 months to recoup the refinance home loan points fees expenses along with other expenses associated with refinancing.
How to decide if one wants to pay refinance home loan points fees or not?
The best way to determine whether to go for refinance after paying the refinance home loan points fees is to run a break-even comparison.
Calculate the total expenses associated with paying refinance home loan points fees and add it to legal fees associated with refinancing. In simpler words calculate the complete expenses of refinancing.
Take for example the total expenses (refinance home loan points fees + legal fees) be $ 2,000 on a mortgage loan worth $ 100,000, paying two points.
Now calculate the number of months it will take to recoup the expense (here $ 2,000). If you plan to live in the house for more than that number of months (usually more than 25 months but can go up to five years), it is better to pay off the refinance home loan points fees and go for a refinance. There can be differences in tax benefits of paying refinance home loan points fees upfront too. If you have plans to live in the same house for another 10 years, there is nothing to calculate and pay 2-3 refinance home loan points fees upfront. The initial expense will be recouped somewhere between 25 and 50 months (in almost all cases).
You will feel like in heaven if you get a zero points/zero fees refinance from a lender. Though it may appear too good to be true, zero refinance home loan points fees is quite manageable by the lenders. People feel like such opportunities are hard to pass up. In fact zero refinance home loan points fees also costs you money in the long run, even while you are paying lower than the original monthly rates and will pay off the loan in the predetermined time. With paying zero points, you get an interest rate higher by 0.25% than the interest rate that you get after paying one point. A two points refinance home loan points fees would mean further reduction of 0.50% of interest rate. Do the math and you will get an accurate picture.
The advantage to you is, you can refinance with literally no upfront cost. You don’t have to calculate lower monthly payment-upfront cost break even. You benefit from the first month onwards. Choose this option if you plan to stay at the house for less than three years.
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